Economists fear QE is fuelling asset bubbles

Tim Wallace
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A BUBBLE in risky assets could keep inflating for at least another year before bursting and causing chaos, analysts warned yesterday.

Quantitative easing (QE) is designed to raise the price of government bonds and reduce the return on such safe assets, pushing investors into other markets to find yield.

But that could cause a dangerous bubble if asset prices no longer reflect market fundamentals.

“Currently it seems there is more liquidity sloshing around than is needed to support economic activity, which historically creates bubbles,” said Simon Henderson from Henderson.

“Typically those burst when the liquidity situation changes – for example if valuations get pushed to silly extremes, that can lead to a bursting.”

It comes after the Bank for International Settlements noted a flood of cash into risky assets despite the poor economic outlook.

“QE is designed to support assets like housing and equities to improve confidence” said Deutsche Bank’s George Buckley. “But it is about striking the right balance – you don’t want to make inflation rise or stoke bubbles.”